Bershidsky on Europe: Chrysler Carries Fiat
Here's today's look at some of the top stories on markets and politics in Europe:
Euro area inflation nears zero
Annual inflation in Germany dropped from 1.6 percent to 1.3 percent in October as consumer prices fell 0.2 percent compared to September. Spain reported 0.1 percent inflation in October and calculated that prices were 0.1 percent lower than a year ago. Annual inflation in the euro area as a whole may be as low as 0.9 percent. The fact that parts of the currency zone are slipping into deflation may prompt the European Central Bank to consider lowering its already low interest rates, but there is an alternative explanation for the zero price growth. The U.S. Treasury provided it in a fresh report on international economic policies: Germany. "Germany’s anemic pace of domestic demand growth and dependence on exports have hampered rebalancing at a time when many other euro-area countries have been under severe pressure to curb demand and compress imports in order to promote adjustment," the report said. "The net result has been a deflationary bias for the euro area, as well as for the world economy." Growth is export-driven in France and Spain, as well as Germany. Domestic demand needs to pick up in these countries if the euro area recovery is to be sustainable.
Fiat issues profit warning despite strong Chrysler results
Italian car maker Fiat cut its profit forecast for the full year by 16 percent as it announced weak third quarter results everywhere except its U.S. subsidiary, Chrysler. The company lost money in Europe and saw its profit halve in Brazil compared to the previous quarter. Chrysler, by contrast, reported healthy growth and a 22 percent rise in profit. Chrysler's $464 million profit was the only reason Fiat remained in the black. Chief executive Sergio Marchionne must be gnashing his teeth as he looks at the numbers: He has failed to buy out the union healthcare trust that owns 40.5 percent of Chrysler. Moreover, the trust has forced him to file for a Chrysler IPO. Though Marchionne is opposed to it, the offering will take place before the end of the year. Afterwards, there may be no alternative for Fiat than to raise its offer for the trust's stake: It might be better for the Italian company than to try to wait out the European car market slump.
PricewaterhouseCoopers swallows Booz & Co.
London-based Big Four audit firm PricewaterhouseCoopers agreed to buy U.S. management consultancy Booz & Co., seeking to expand its consulting business as audit revenue growth slows down. In 2012, PwC's revenues from the advisory business grew 7.6 percent, compared to just 1.4 percent for auditing. Booz, for its part, was finding it difficult to stand alone in competition with top-tier firms like McKinsey and Boston Consulting Group. Though both players have strong reasons for doing the deal, it raises conflict of interest questions. A decade ago, the Enron scandal showed what happens when audit firms provide consulting services to their clients. Though in the U.S. the Sarbanes-Oxley act made it difficult for one firm to provide both types of services to the same client, the Big Four are now making money consulting on Sarbanes-Oxley compliance. Then there is the rest of the world, where auditing and consulting the same company is still allowed: The EU has tried and failed to ban the practice. Old lessons tend to be forgotten when audit firms are unable to find a better growth model than expanding in advisory services.
Swiss Re says global warming may cost 20 percent of GDP
David Bresch, head of sustainability at the giant reinsurer Swiss Re, said climate change may cost the world economy 20 percent of its current gross product by the end of the century, because of the growing incidence of natural disasters. Just days ago, northern Europe was hit by some of the worst storms in recent history, which killed at least 15 people and left hundreds of thousands of homes without power. Scientists and lobbyists may argue about the connection between such disasters and global warming, but insurers, who ultimately bear most of the costs, have no doubts. "Losses due to floods, storms, earthquakes and other natural disasters are becoming more frequent due to climate change, and more severe, due to the concentration of assets in the most exposed areas," Bresch said.
Barroso warns against nationalism, xenophobia
European Commission President Jose Manuel Barroso is worried about the rise of nationalism and xenophobia ahead of next year's European Parliament election. "We have to be honest that the crisis and the rise in unemployment is an occasion for populist forces to become more aggressive and gain some votes," Barroso told Reuters in an interview. He even went so far as to invoke the ghost of Nazism. Though the election is seven months off, it is easy to foresee that the European Commission might find it hard to work with the parliament it produces. The anti-immigrant U.K. Independence Party is expected to come in at least second in Britain, and the National Front may win the election in France. Barroso's message is for traditional centrist parties to stand up and fight: "At a time of crisis, we cannot take the European Union for granted."
(Leonid Bershidsky can be reached at firstname.lastname@example.org).